Global Logistics

Management
MGT2119

Fall 2023
 Week 12: Logistics Network
Design
more basics

2
 Learning Objectives
❑ Identify the key factors to be considered when
designing a distribution network.

❑ Discuss the strengths and weaknesses of

various distribution options.

❑ Understand how online sales have affected

the design of distribution networks in different
industries.

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Distribution Network Design
 Source : C. John Langley Jr., Ph.D., Penn State University. Used with permission.
Macro Perspective on Logistics
U.S. Business Logistics Costs
 Network Problems
“Plant to Warehouse”

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The Transportation Problem

𝑀: set of plants
𝑁: set of warehouses
𝑐 : cost between i and j
𝑖𝑗

𝑏 : demand at warehouse j
𝑗

𝑎 : capacity at plant i
𝑖

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 What are the Variables

➢ Decide the production quantity at each plant

➢ Find a shipping pattern form plants to warehouses to satisfy demand

𝑥 = amount of product produced at

𝑖𝑗

plant i shipped to warehouse j

variables (continuous)

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 Mathematical Model

➢ Objective: Minimize the total shipping cost

➢ Unit shipping cost from plant i to warehouse j: cij

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 Network Problems
“maximum”

1
The Network Flow
Ford-Fulkerson Method
Capacity

25
1 3

Source 0 6 5 Sink
(s) (t)

15
2 4

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 • The matrix is symmetric since the graph is Max ෍ 𝑥𝑖𝑗
undirected (the flow from node i to node j is 𝑖𝑗
the same as from node j to node i).
Subject to:
Flow Conservation:
0 1 2 3 4 5 σ𝑖 𝑥𝑖𝑗 − σ𝑖 𝑥𝑗𝑖 =0
0 0 10 10 0 0 0
Capacity Constraints:
1 10 0 0 25 0 0
0 ≤ 𝑥𝑖𝑗 ≤ 𝑐𝑖𝑗
2 10 0 0 0 15 0
3 0 25 0 0 0 10 Flow into the sink
4 0 6 15 0 0 10
σ𝑖 𝑥𝑖5 = Total Flow
5 0 0 0 10 10 0

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The Network Flow

Flow/Capacity

0/25
1 3

Source 0 0/6 5 Sink

(s) (t)

0/15
2 4

Ford-Fulkerson Method
Finds Augmenting paths Through the residual graph and augments the flow until
no more augmenting paths can be found
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The Network Flow

Augmenting the flow

1 6/25 3

Source 0 5 Sink
(s) (t)

2 4
6/15

Min (10-0, 15-0, 6-0, 25-0, 10-0) min=(10,15,6,25,10) min=6 Bottleneck = 6

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The Network Flow

Residual flow

1 6/25 3

Source 0 5 Sink
(s) (t)

2 4
6/15

16 Bottlenecks = 6
The Network Flow

Residual flow

1 6/25 3

Source 0 5 Sink
(s) (t)

2 4
10/15

Min (10-6, 15-6, 10-0) min=(4,9,10) min=4

17 Bottlenecks = 6 & 4
The Network Flow

Residual flow

1 6/25 3

Source 0 5 Sink
(s) (t)

2 4
6/15

Min (10-0, 0- -6, 10-4) min=(10, 6 ,6) min=6

18 Bottlenecks = 6 & 4 & 6
The Network Flow

Residual flow

1 10/25 3

Source 0 5 Sink
(s) (t)

2 4
6/15

Min (10-6, 25-6, 10-6) min=(4, 19 ,4) min=4

19 Bottlenecks = 6 & 4 & 6 & 4
 Bottlenecks or Maximum Flow= 6 + 4 + 6 + 4 = 20

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1 3

Source 0 6 5 Sink
(s) (t)

15
2 4
Duality theorem : Max Flow=Min Cut Capacity

minimum cut = 10+ 10 = 20

25
1 3

Source 0 6 5 Sink
(s) (t)

15
2 4
 A Mixed Integer Problem

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Design of a regional network for SunOil
The vice president of supply chain is considering several options to meet demand.
➢ One possibility is to set up a facility in each region.
The advantage of such an approach is that it lowers transportation cost and also helps avoid duties that may be imposed if product is imported
from other regions.
The disadvantage of this approach is that plants are sized to meet local demand and may not fully exploit economies of scale.
➢ An alternative approach is to consolidate plants in just a few regions.
This improves economies of scale but increases transportation cost and duties.

Your task:
What lowest cost network should look like?
When designing a regional configuration, the logistic manager must consider quantifiable trade-offs along with non-quantifiable factors such as the
competitive environment and political risk.

For SunOil, the vice president of supply chain decides to view the worldwide demand in terms of five regions:

Demand Region
Production & Transportation Cost per 1,000,000 Units
• North America, Supply N. S. Fixed Cost Low Fixed Cost High
• South America, Region America America Europe Asia Africa ($) Capacity ($) Capacity
• Europe, N. America 81 92 101 130 115 6,000 10 9,000 20
• Africa, and S. America 117 77 108 98 100 4,500 10 6,750 20
Europe 102 105 95 119 111 6,500 10 9,750 20
• Asia.
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20
Demand 12 8 14 16 7
Cost Data (in Thousands of Dollars) and Demand Data (in Millions of Units) for SunOil

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 What are the Variables
Demand Region “j ”

North America South America Europe Africa Asia

North America ? ? ? ? ?
Supply Region “i ”

South America ? ? ? ? ?

Europe ? ? ? ? ?

Africa ? ? ? ? ?

Asia ? ? ? ? ?

if plant i is open or not and what Quantity shipped from plant i to market j

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 Mathematical Model
n = number of potential plant locations/capacity (n = 10, sine there are 5 locations x 2 potential plant capacities )
m = number of markets or demand points (m=5, we have 5 markets)
Dj = annual demand from market j
Ki = potential capacity of plant i
fi = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant i to market j (cost includes production, inventory, transportation, and tariffs)
Cij Ki
Demand Region
Production & Transportation Cost per 1,000,000 Units n n m
Supply N. S. Fixed Cost Low Fixed Cost High
Region America America Europe Asia Africa ($) Capacity ($) Capacity Min 𝑧 = ෍ fi yi + ෍ ෍ cij xij
N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20 i=1 i=1 j=1
Europe 102 105 95 119 111 6,500 10 9,750 20
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20
Demand 12 8 14 16 7 𝑛
Dj
Cost data (in $1,000) Demand data (in 1,000,000 units)
෍ 𝑥𝑖𝑗 = 𝐷𝑗 𝑓𝑜𝑟 𝑗 = 1, . . . , 𝑚
𝑖=1
𝑚
Decision Variables: fi
෍ 𝑥𝑖𝑗 ≤ 𝐾𝑖 𝑦𝑖 𝑓𝑜𝑟 𝑖 = 1, . . . , 𝑛
yi = 1 if plant i is open, 0 otherwise 𝑗=1
xij = quantity shipped from plant i to market j 𝑦𝑖 ∈ 0,1 𝑓𝑜𝑟 𝑖 = 1, . . . , 𝑛, 𝑥𝑖𝑗 ≥ 0

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 Small Large
Demand Region - Production Allocation (1000 Units) Plants Plants Total

Supply Region N. America S. America Europe Asia Africa (1=open) (1=open) Plants

N. America 0 0 0 0 0 0 0 0

S. America 12 8 0 0 0 0 1 1

Europe 0 0 0 0 0 0 0 0

Asia 0 0 4 16 0 0 1 1

Africa 0 0 10 0 7 0 1 1

Cost = $ 23,751,000
 Some alternative scenarios to try
1. What if a plant must be built in Europe?
2. What if plants must be built in every market?

Demand Region
Production & Transportation Cost per 1,000,000 Units
Supply N. S. Fixed Cost Low Fixed Cost High
Region America America Europe Asia Africa ($) Capacity ($) Capacity
N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20
Europe 102 105 95 119 111 6,500 10 9,750 20
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20
Demand 12 8 14 16 7

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Thank you